The report's assessment of China's naval capabilities draws on information from think tanks and U.S. naval intelligence. It said China is known to be building seven classes of vessels, including nuclear and diesel submarines, destroyers and other warships. It expects the naval modernization to continue for the "forseeable future."

China's is also advancing its capabilities in space, which is viewed as critical because of the use of communication satellites for intelligence and modern warfare.

For the first time, there are public indications China may be developing the ability to target satellites at the high altitude used by the U.S. global positioning system and many military and intelligence satellites, according to the report.